Making the Business Case for the Offshoring Business Model

Consider Russell Stover, for example. It’s been up for auction since February, and some analysts believe one reason the boxed-chocolate brand hasn’t yet sold is the question of where the Kansas-headquartered company ultimately will make its chocolates.

“Sugar quotas have made production of chocolate in the U.S. very expensive relative to production based in other places,” Tom Vierhile, a Datamonitor consumer analyst told ConfectioneryNews.com. “I do not expect a new owner to outsource production immediately, but it would not shock me if some baby steps were taken in that direction.”

With slow growth in the mainstream boxed-chocolate market, a foreign buyer with an overseas manufacturing operation could expand the Stover brand internationally. However, the Russell Stover brand “is woven into the fabric of America, and overseas production could rattle the firm’s core consumers,” Vierhile said, making an offshoring decision difficult for even a new owner.

LOOKING AT THE PROS AND CONS

In general, the reasons for a CEO or business owner to choose to outsource is cost reduction. Typically, concerns about U.S. labor costs vs. those in China still exist, although labor costs in China there have been rising. There are alternative countries with low-cost labor, however, such as Thailand.

Overhead costs of U.S. manufacturing—utilities, equipment maintenance and the costs of meeting American regulatory requirements—also can help tilt the balance toward offshoring. Gaining flexibility by hiring an overseas contract manufacturer, compared with establishing dedicated production in-house, also can be appealing.

CEOs who decide to offshore production also must deal with the risks of political turmoil or disruption abroad. The chances of supply-chain disruption thousands of miles away comprise one factor that has helped convince more American manufacturers to tighten their logistics network by moving output back to the United States.

Reshoring has become de rigueur for American manufacturing these days. But for cost-conscious CEOs trying to thrive in a U.S. economy that remains sluggish and uncertain, outsourcing abroad still offers tempting opportunities. They simply must be well-considered.